Wednesday, September 16, 2009

My Apologies to the BLS

In this post, I ranted against the shady tactics of the BLS in suppressing price inflation. In my sleep deprived rage (my son woke me up far too early), I wrote:

For example, both on NPR and in the CNBC story linked above, they talked about how prices for retail automobiles fell sharply, but they expect them to rise in September. The reason? Oh, cash-for-clunkers, of course! But wait a second. If the government hands out up to a $4,500 subsidy to buy a new car, shouldn't that increase sticker prices? E.g. do we explain plummeting college and health care prices by reference to government support? Of course not--that's how we explain skyrocketing tuition and medical expenses.

After last month's CPI release, people on CNBC were talking about this, so I called the BLS. And the guy I talked to assured me that they were measuring the actual sticker price, before the government rebate. That makes sense economically, but it wouldn't surprise me in the slightest if the people at the BLS decided to buy themselves an extra two months of suppressed CPI by counting the post-rebate price for new cars.

Oops, my bad. The cash-for-clunkers program was a rebate to the dealers, not to the car buyers. (That's why the dealers are freaking out about the government being late in sending the actual checks.)

So the BLS guy wasn't lying, and it would make sense for the CPI numbers to show a sharp drop in sticker prices for cars. Because the dealer is getting (up to) a $4,500 check for each of the qualified new cars he sells, he would be willing to sell at a much lower price, splitting the rebate with the consumer as it were. (If you and I were locked in a room with nothing but a dry erase board and marker, I would torture you for a good hour showing how the elasticities of the supply and demand curves determine how much of the rebate goes to seller and how much to the buyer.)

This shouldn't be considered an attempt to be locked in a room with you and an dry eraserboard, but I think you were originally correct.

Not necessarily that the BLS was intentionally misleading, but that what the dealers recvd should have been considered part of the price of the car. If the gvt set up a program that paid 35k to dealers everytine someone bought a BMW for $1,000 plus the dealer rebate of 35k, it would be absurd to say the car sold for $1,000.

I get what you're saying and I'm too tired to argue with you. (I think my son has just decided that his wakeup time is now permanently 90 minutes earlier than it was last week. Argh.)

But if we're trying to measure the cost of living (which is what the CPI is supposed to do), I wouldn't say that poor parents are "really" paying $12,000 a year (or whatever) to send their kid to the public school down the street. No, the price to them is zero.

There are of course problems with that decision (like misleading people into thinking it's "free"), but I think there are problems if we do it your way too.

In any event, what the BLS is doing is more defensible than I thought it was at first.

Robert Wenzel brings up an excellent point. How much is CPI understated simply due to government "subsidies" of all kinds that aren't counted as part of the sales price? The public education example that Robert Murphy described flows right into this point. For example, does the BLS count inflation in public education via the cost to government, or the taxpayer, or do they include it in the basket of goods at all?

Prices for new cars fell quite a bit (1.3 percent) - while prices for USED cars rose by slightly more (1.9 percent). This shouldn't be a surprise. Since used "Clunkers" now had an artificially increased trade-in value, the price of used cars is going to rise. As you note, the subsidy goes to the dealer, so the sticker price of new cars should fall.

So, I wouldn't be surprised if Cash 4 Clunkers is close to a "wash" as far as CPI goes.

Lucas, does the price increase for used cars that you cite include used cars sold by private owners? I would guess that someone buying a used car strictly for the purpose of trading it in under the Clunkers program is unlikely to have purchased from a dealer.

I'm not sure, but I doubt it - for the same reason that I doubt prices at garage sales show up in the CPI. I don't think that should matter much, though. After all, there is some decent substitutability between privately sold used cars and dealer sold used cars, so we should expect the two prices to track each other reasonably well.